Analysts see US downstream rebound possible in 2003

By <a href=ogj.pennnet.com>Oil & Gas Journal editors

HOUSTON, June 3 -- The US refining industry is poised for a good year in 2003 because gasoline stocks are on the rise while refinery throughput and gasoline imports are near record levels.

"With the exception of the West Coast markets, industry margins across the remainder of the country were at record levels in the first quarter," said Bryan Caviness, an analyst with Fitch Ratings Ltd.

West Coast refiners did not receive the benefit from a cold winter or from the uncertainties in global crude supply during late 2002, he explained.

Overall, the US downstream sector experienced "unseasonably strong (first quarter) earnings for most refining and marketing companies. The cold winter, a heavy turnaround season, the general strike in Venezuela, and the looming war in Iraq factored into strong demand for gasoline and distillates, and a sharp drop in inventories," Caviness said.

Summer driving season As the US enters the summer driving season, refiners are running at more than 94% capacity and 15.8 million b/d of throughput to capture the historically strong summer margins, he said.

"The refining sector's ability to control production will again be the key issue to sustaining the strong margins seen in the first quarter," Caviness said.

A run up in throughput during recent weeks has pushed gasoline stocks to more normal levels than seen earlier this year, and margins have reflected that, he said.

Gasoline imports The US imported nearly 460,000 b/d of distillates and a record 767,000 b/d of gasoline during the first quarter.

"Compared with full year 2002, Canada and the Netherlands showed the most notable increases in refined product exports to the US in January and February. Argentina, Norway, and the UAE have also significantly increased refined product sales into the US markets," he said.

In the short term, gasoline imports averaged more than 1 million b/d through April, a 23% increase compared with April 2002.

"Looking forward to 2004, gasoline imports will become a key issue with the ultra-low-sulfur gasoline regulations. With nearly 40% of gasoline imports in the form of blending components and a significant percentage of refiners not required to meet similar specifications domestically, Fitch Ratings expects a significant drop in gasoline imports in 2004," Caviness said.

Refining environment A difficult margin environment last year taught the US refining industry that its record earnings experienced during 2000-01 are not guaranteed and that paying too much for refining assets can strain a company's financial flexibility, he said.

After last year's dismal earnings reports, refiners are more committed to improving and maintaining a stronger balance sheet than they have been in previous years, he said.

"Fitch maintains a stable outlook for the downstream sector, although sharp volatility in margins will remain. The remainder of 2003 is expected to be a midcycle or better as refiners begin investing the capital to meet the low-sulfur gasoline regulations in 2004 and diesel regulations in 2006," Caviness said.